CFA Society Netherlands Advice Date: April 11, 2014 Subject: Review Dutch tax (compliance) structure Introduction 1. Facts and assumptions The facts and assumptions we have used for our analysis are as follows: - CFA Society of the Netherlands ( CFA NL ) is incorporated under Dutch law and effectively managed in the Netherlands; - CFA NL has the legal form of a society (in Dutch: Vereniging ); - CFA NL is a non-profit organization that seeks to operate on a cash neutral basis in the long term. - Currently, CFA NL is tax-exempt, i.e. not liable to Corporate Income Tax ( CIT ). - The mission of CFA NL is to lead the investment profession in the Netherlands by setting the highest standards of ethics, education and professional excellence. - The purpose of CFA NL is to act on behalf of its members, which are working in the financial sector. - The members of CFA NL are also members of CFA US ( the parent corporation ). Members of CFA US pay a membership subscription fee. Members of the CFA US can also choose to become members of CFA NL. Those members need to pay an additional membership subscription fee (for the membership of CFA NL) which CFA US collects on behalf of CFA NL and consequently pays that subscription fee to CFA NL. - CFA NL promotes the interest of the financial sector, particularly in the Netherlands. Its members, who work in the financial sector, pay a membership subscription, the greater part of which goes towards activities designed to promote their general interest. - In addition to promoting those interests, CFA NL provides a number of individual services to its members, for which it charges no (or limited) extra fees since the costs of providing these services are taken into account in the payment of the membership subscription. These individual services to its members consist of free events or providing a discount to those events and in the future providing inter alia access to a job board specifically for the financial sector. - CFA NL receives various payments from CFA US as subsidy or compensation for expenses for organizing activities intended to promote the financial sector. These events are not always exclusively for members, but for instance also for students. - CFA NL receives remuneration for so called strategic sponsorship packages for organizing events, under the condition that CFA NL promotes the name of the sponsor (e.g. Bank x). - Furthermore CFA NL organizes broadly four types of events: (1) annual events, (2) larger, topical education events, (3) smaller topic-specific events and (4) events which are co-organized with CFA NL s partners. - CFA NL has built up a team of volunteers (including the board members of CFA NL) to support the organization of the events. - Since 2010 (financial year 2010/2011), CFA NL holds all the shares in CFA Support BV ( CFA BV ) incorporated under Dutch law and effectively managed in the Netherlands; - CFA NL assigns CFA BV to perform the above mentioned activities for which the CFA BV receives a remuneration (funding) from CFA NL.
- CFA BV was founded in 2010 in order to conduct the Staffed Office activities with respect to office space, equipment and personnel in a separate entity. - As from January 1, 2012, CFA BV has hired an independent contractor to perform these Staffed Office Services. We understand that the services are not performed full time and that this person (Mrs Thompson) has provided similar services to various different contractors in the past. We also understand that the number of individuals with similar contracts has recently been increased. - In the financial years 2007/2008 up to and including 2009/2010, CFA NL realized the following profits: o 2007/2008: 15.636 o 2008/2009: 3.234 o 2009/2010: 2.344 - In the financial years 2010/2011 up to and including 2012/2013, CFA NL and CFA BV realized the following results: Year CFA NL CFA BV Consolidated 2010/2011 47.725 -/- 42.079 5.646 2011/2012 76.842 -/- 73.304 3.537 2012/2013 118.970 -/- 60.957 58.012 - The main sources of income for CFA NL consist of annual membership fees, sponsorship from CFA Institute to finance the organization of events and to professionalize the organization. For the latter source of funds, the board of CFA NL frequently needs to submit a business plan in order to receive funds from CFA Institute. - The main sources of income for CFA BV consist of income from the Program and Events and from Education and Courses as well as funding received from CFA NL. We also refer to the documents attached to the email of Jeroen Bos dated 7 February 2014. 2. Executive Summary From a corporate income tax and VAT perspective we do not see benefits of having a two entities structure assuming that the consolidated financial results of CFA NL and CFA BV will not increase. The disadvantage of liquidating CFA BV may be the loss of NOLs. However, if the foundation can qualify for the small foundation exemption, there is still no corporate income tax due. For VAT purposes the activities of CFA NL partly qualify as VAT entrepreneur. Since CFA BV is subcontractor of CFA NL, it is qualified as VAT entrepreneur. Nevertheless, CFA BV is not required to charge VAT to CFA NL since we believe that CFA NL and CFA BV qualify as fiscal unity for VAT purposes. CFA NL has never charged VAT for part of its membership fees. This is not correct and we suggest to reach a practical agreement with the Dutch Revenue for the past as well as the future. In addition there are also possibilities to recover input VAT, which has not been done in the past. In order to avoid any wage tax risk we would recommend asking all the contractors to provide CFA with a VAR WUO declaration to prevent that CFA has employers obligations. Contracting persons for more than 20 hours a week is maybe not advisable. Terminating contracts with persons that cannot provide a VAR WUO is advisable. If
this situation would occur, we would recommend that we do a check for the past to determine whether CFA is also exposed and determine whether there are any employers obligations. 3. Questions Corporate income tax What is the optimal way to structure CFA NL from a Dutch corporate income tax perspective, taking into consideration the following aspects: 1. The current corporate income tax rules and the benefit of CFA BV; 2. Risk perspective considerations (current structure versus one-entity-structure); 3. Cost considerations of going back to one-entity-structure; 4. The status of gifts received CF NL; 5. Positioning of different events and activities including offering a special CFA preparation course to professionals; 6. Implications of money flows from CFA NL to BV and vice versa; 7. Sustainability (future proof); VAT A.What is the VAT position of both CFA NL and CFA BV, more specifically taking into account the following aspects: 1. For which activities does CFA NL and/or CFA BV qualify as VAT entrepreneur?; 2. For which activities does Dutch VAT need to be charged?; 3. Do CFA NL and CFA BV qualify as a VAT group?; 4. Do CFA NL and CFA BV have the right to deduct input VAT, and if so to what extent? B. What is the optimal way to structure CFA NL and CFA BV from a VAT point of view, taking into consideration the VAT position and the need to have a low maintenance structure (given the fact the volunteers do most of the day to day work). Wage tax Is there a wage tax compliance risk for CFA BV and how can we mitigate any (remaining) risk.
4. Analysis 4.1. Corporate income tax 4.1.1. Relevant CIT legislation Corporate income tax liability A society is liable to CIT but only if and insofar it runs an enterprise (note that if a society does not run an enterprise, but is competing with enterprises with similar activities, it is also liable to CIT). It should be determined per activity whether or not it can be considered an enterprise. An enterprise exists in case of: - An organization of capital and labor; - That is participating in the economic environment; - With an objective to realize profits Based on Dutch case law, the presence of a structural surplus is a strong indicator for the existence of an objective to realize profits. A BV is deemed to run an enterprise with all its assets and liabilities as a result of which its always fully liable to CIT. The current legal structure is set up with the purpose of allocating the activities that can be considered an enterprise to CFA BV. The activities that should not be considered an enterprise are currently performed by CFA NL. Based on the facts and assumptions, the activities of CFA NL should in principle be tax exempt as they are not aimed at realizing profits. Although the profits realized by CFA NL in the last financial years have resulted in a significant amount of surplus cash, this should not lead to an objective to realize profits. This because the profits arose mainly from annual membership fees and sponsorship from CFA Institute, which should be considered income from non-entrepreneurial and therefore tax-exempt activities. We note however, that it is important to monitor the surplus cash position of CFA NL in order to avoid that the Dutch tax authorities will take the position that CFA NL is subject to CIT. It could be considered to obtain a ruling from the Dutch tax authorities confirming the tax-exempt position of CFA NL. This will only be interesting if CFA would decide to continue with the existing business set up. Exemption for small foundations and societies. As per 1 January 2012, an exemption of CIT applies on so-called small foundations and societies. This exemption applies if the following requirements are met in a financial year: 1. The taxable profit of the financial year does not exceed 15.000, or; 2. The taxable profit of the financial year and the preceding four years does not exceed 75.000. If a loss is realised in a certain year, the profit is deemed to be nil. In other words, for the purpose of the 75.000 threshold it is not possible to offset losses with future profits. Upon request of the foundation or society, it is possible to opt for tax liability. If a foundation or society has opted for tax liability, it remains subject to tax for at least five years. Based on the facts and circumstances, if all the activities of CFA NL and CFA BV would be carried out by CFA NL, the taxable profits of CFA NL should not exceed an amount of 15.000 or an amount of 75.000 during a five-year period (assuming the results remain more or less the same). Also in financial year 2012/2013 the taxable profits
should not have exceeded an amount of 15.000, because the profits of CFA NL mainly arose from annual membership fees and sponsorship from CFA Institute, which should be considered income from nonentrepreneurial and therefore tax-exempt activities. ANBI-status Certain entities can apply for the so-called ANBI-status, i.e. the status of an institution looking after the public interest (in Dutch: Algemeen Nut Beogende Instelling). If an entity has the ANBI-status, it has the following tax benefits: 1. All profits realized by its subsidiary BV which are distributed to the ANBI are tax-deductible, provided the following requirements are met: a. The activities of the subsidiary are considered known fundraising activities, i.e. they are for more than 50% performed by volunteers and consist of services rendered against an arm s length price but with a lower cost price and it is known to the buyer that the proceeds are meant for the public interest b. The subsidiary has the obligation to distribute at least 90% of the proceeds within six months after the years in which the funds were raised. 2. Gifts received by and from an ANBI are exempt from gift tax. 3. Gifts made to an ANBI are deductible for Personal Income Tax and CIT purposes. In order to qualify for the ANBI-status, an entity should meet a number of requirements. Based on the facts and assumptions, we do not expect CFA NL to meet these requirements. For the purpose of this memo, we will not elaborate on the possibility of obtaining the ANBI-status.
4.1.2. Optimal structure from a CIT perspective The optimal structure - taking into consideration the aspects as mentioned in paragraph 2 - depends largely on the expected results to be achieved by CFA NL and CFA BV. In this respect, there are 3 possible scenarios: 1. The expected consolidated results of CFA NL and CFA BV will increase significantly; 2. The expected consolidated results of CFA NL and CFA BV will remain the same; 3. The expected consolidated results of CFA NL and CFA BV will decrease significantly. Compared to a one-entity structure in which only CFA NL will remain in place, the current legal structure is only attractive if case scenario 1 would occur. In that case, the main benefit of the current legal structure is that the losses incurred by CFA BV up to and including 2012/2013 are in principle available to offset against future profits of CFA BV, as a result of which any profits realized in the coming years will not be subject to Dutch CIT. These losses can no longer be used as from the moment CFA would go back to a one-entity structure. Other benefits are: 1. There is a clear distinction between the entrepreneurial and thus taxable activities (performed by CFA BV) and the non-entrepreneurial and thus tax-exempt activities (performed by CFA NL); 2. There are no specific reputational or other risks attached to the current structure. The current structure does not involve tax planning that could be considered aggressive as all the entrepreneurial activities are performed by a taxable entity. However, taking into consideration the consolidated results of CFA NL and CFA BV and assuming scenario 1 will not occur, it could be considered to liquidate CFA BV and to transfer the activities of CFA BV back to CFA NL. If, as from that moment, the taxable profits of CFA NL would not exceed an amount of 15.000 or an amount of 75.000 during a five-year period, CFA NL would not be subject to CIT under the exemption for small foundations and societies. We note that such a transfer of activities may lead to a realisation of hidden reserves. If this would result in a profit after loss compensation, corporate income tax is due over these profits. However, given the fact that CFA BV is loss making, it is questionable that any hidden reserves will be realised upon liquidation of CFA BV. If it is expected that scenario 1 will occur and the positive results will increase significantly over the next five years, there is a possibility that CFA NL would not be able to meet the requirements under the exemption for small foundations and societies. In case the increase in result from 2011/2012 to 2012/2013 and the result of the latter financial year represents the expected (increase in) results for the upcoming years, the exemption for small foundations and societies may not be applicable during a long time. In that case, an annual CIT return should be filed by CFA NL with respect to the taxable activities and CFA NL should thus be able to demonstrate which activities are taxable and which activities are tax-exempt. In that respect, going back to a one-entity structure may not result in significant savings of administrative costs and it may lead to an additional corporate income tax liability because the losses of CFA BV are no longer available. If it is expected that scenario 1 is unlikely to occur in the upcoming years and/or if it is expected that the results are relatively easy to manage, the optimal way to structure CFA NL from a Dutch corporate income tax perspective, would be to go back to a one-entity structure.
4.2. VAT Position A.What is the VAT position of both CFA NL as CFA BV, more specifically taking into account the following aspects: 1. For which activities does CFA NL and/or CFA BV qualify as VAT entrepreneur?; 2. For which activities does Dutch VAT need to be charged?; 3. Do CFA NL and CFA BV qualify as a VAT group?; 4. Do CFA NL and CFA BV have the right to deduct input VAT, and if so to what extent? 4.2.1. For which activities does CFA NL and/or CFA BV qualify as VAT entrepreneur CFA NL CFA NL does not qualify as a VAT entrepreneur for the activities that consist of promoting the general interest of the financial sector. In such cases as the present one, there is no consumption from a VAT point of view. The members do not acquire goods or services for their own use but instead the financial sector is promoted. On the other hand, CFA NL does qualify as a VAT entrepreneur for activities which benefit the members directly like organizing events for her members, providing education and for the intended job board for which she will provide specific vacancies in the financial sector to her members and for which CFA NL receives remuneration (in the form of membership subscription fees). CFA NL also qualifies as a VAT entrepreneur for the strategic sponsorship packages since CFA basically needs to provide advertising services in exchange for the payments of these sponsors. CFA BV CFA NL basically uses CFA BV as a subcontractor, CFA BV performs various activities like organizing events, providing education and promoting the financial sector on behalf of CFA NL. CFA BV receives remuneration for performing these services. Consequently CFA BV qualifies as a VAT entrepreneur. In general all remuneration falls within the scope of VAT. 4.2.2. For which activities does Dutch VAT need to be charged CFA NL The membership subscription fees basically need to be divided into a part that falls within the scope of VAT, which is the part that is accountable to providing free events for members and the upcoming job board, and on the other hand the part that falls outside the scope, consisting of the membership subscription fees that is accountable to promoting the financial sector. CFA is due 21% VAT on the part of the membership subscription fee that is within the scope of VAT (free events and job board).we understand the CFA NL did not file any VAT returns, as a result this VAT has not been accounted yet.
In practice it is quite difficult to exactly determine which part of the membership fee falls within the scope of VAT and which part falls outside the scope of VAT. In general you can come to an agreement with the Dutch Tax Authorities ( DTA ) regarding this issue. Furthermore, the strategic sponsor ship packages, for which CFA NL needs to promote the name of the sponsor, is VAT taxable. Consequently, CFA NL should issue invoices including VAT to these sponsors for (basically) providing advertising services. However, we understand that the sponsors are established in other EU countries or outside the EU. As a result, the levying of VAT is reversed charged to the customer if and insofar as the customers have a VAT identification number which has been issued in that other member state and these services are performed using that VAT identification number on the invoices (for customers established in another country). Although no VAT is due by CFA NL, it is still required to report these services provided to customers established in another EU countries on her VAT return and file EC Sales Listings. For customers outside the EU, it is not required to have a valid VAT number (if any) nor required to include that turnover on the EC Sales Listings. CFA NL is also due 21% VAT on the remuneration for providing education. The subsidies CFA NL receives from CFA US to compensate the expenses for organizing activities to promote the financial sector fall outside the scope of VAT in our opinion. CFA US nor any other person or group of persons benefit directly from the activities performed by CFA NL since these activities relate to promoting the general interest of the financial sector (therefore no consumption as envisaged in the VAT system is present) CFA BV The renumeration CFA BV receives for providing services to CFA NL is in general VAT taxable. However, CFA BV probably forms a VAT group with CFA NL (please see par. 3.2.3). Services provided by one member of the VAT group to another member of the VAT group qualify as internal services which fall outside the scope of VAT. As a result no VAT is due. 4.2.3. Do CFA BV and CFA NL form a VAT group? VAT taxable persons that have a significant financial, organizational and economic link form a VAT group. A significant financial link is present in case the majority of the shares, voting right included, are held by the same person/entity. In this case this condition is fulfilled since CFA NL holds all the shares of CFA BV, voting rights included. An organizational link is basically present if the VAT taxable persons are managed by the same board, which is the case in the present situation. The condition of the economic link can be met if: 1) the turnover from intra-group services or goods supplied amounts to more than 50%; or 2) there is a joint customer base. Recently the Supreme Court has ruled that the economic link may also be present where goods are supplied to a VAT group which has several customers in common. In our opinion this condition is met since the intra-group services of CFA BV to CFA NL amount to more than 50%. Given the above, CFA BV and CFA NL form a VAT group. In contrary to the so called fiscal unity for Corporate Income tax purposes, a VAT group exists if and insofar the conditions are met. It is therefore not relevant whether an official notification from the DTA is present nor is it relevant whether an application to form a VAT group has been filed.
4.2.4. Deduction of input VAT Input VAT related to expenditure for non taxable activities is in general non deductible as this falls outside the scope of the VAT system. For input VAT related to expenditure for taxable activities the following rules apply: o input VAT that can be directly and exclusively allocated to taxable supplies is fully deductible; o input VAT that can be directly and exclusively allocated to exempt supplies (like financial and i insurance supplies) is not deductible; o input VAT that can be allocated to both taxable and exempt supplies (general costs) is deductible on a pro rata basis. The pro rata is in general based on the percentage of taxable and exempt turnover. Since CFA NL and CFA BV form a VAT group, the right to deduct input VAT related to general costs should be determined on the level of the VAT group and not on the level of the separate entities. Consequently, CFA NL can deduct general costs on a pro rata basis. We understand that currently CFA NL has not deducted any input VAT. Based upon our understanding this is not correct since CFA NL has the right to partly deduct input VAT. 4.2.5. Optimal structure from a VAT perspective From a VAT perspective the current legal structure does not have any benefits. The two entities form a VAT group and are therefore considered to be one VAT entrepreneur. From a practical point of view it can be beneficial to conduct all activities from one entity. It might be beneficial for CFA NL to conduct all activities, consequently CFA BV does not act as a subcontractor for CFA BV any more, and therefore CFA BV can either be liquidated or remain for possible future use. 4.3. Wage Tax To avoid that CFA will be required to withhold wage tax and be subject to many other employers obligations, it is important to take adequate measures. Although it is currently in the spotlight and the newspapers, the most efficient measure is asking each contractor to provide a VAR WUO declaration which is in essence a confirmation from the Dutch Revenue that the person qualifies as entrepreneur. With this VAR WUO declaration it is not possible to be held liable for wage tax and therefore it provides effective protection. This requires for instance that the contractor is independent and also has other clients as well. If a contractor cannot provide a VAR WUO, this is probably a reason to terminate the contract. Nevertheless, it is important first to check the reason of the refusal of the Dutch Revenue and to check any liability for the past. We can assist you with that. For new contractors we recommend that the provision of the VAR WUO is a requirement before entering into a business relation with this person. Furthermore, it is not advisable to contract person for more than 20 hours a week.
5. Way forward 5.1. CIT Determine whether it is likely that CFA NL can qualify for the small foundation exemption in the future Decide to liquidate the BV or not Ask for a ruling for the small foundation exemption 5.2. VAT Liaise with the DTA to determine for which part of the membership subscription fees Dutch VAT needs to be levied and which part falls outside the scope of VAT. Liaise with the DTA to determine the right of deduction of input VAT, specifically VAT on expenditure that is related to both VAT taxable as well as to non VAT taxable activities (e.g. promoting general interest of financial sector ). Based on the results of the above, determine if ultimately, CFA NL and CFA BV need to pay additional VAT for the period 2009 up to and including 2013 or can reclaim additional VAT. It might be beneficial that CFA NL conducts all activities, therefore CFA BV does not operate as a subcontractor any more for CFA NL, Setting up a practical VAT manual describing among other things the following subjects: 1) on which invoices does Dutch VAT need to be included?, to which entity the vendors should issue invoices and how to calculate the right to deduct input VAT. 5.3. Wage Tax Request all contractors to provide a VAR WUO declaration If this is not possible for all existing contractors, determine past wage tax risk and determine appropriate measures